I'm sorry to be the harbinger of bad tidings but the current plight of UK based retirees is bad enough but at least their incomes aren't as immediately burdened by a decline in the value of Sterling. A weak Pound obviously represents an added burden for retirees living abroad, so the current economic climate is having a noticeable impact on incomes. Of course, there have been great benefits gained from extremely favourable past exchange rates. But the currently adverse economic effects caused by a raging war in the heart of Europe as well as the 'unintended consequences' of fiscal and monetary interventions (which I wrote about in a recent edition of The Portugal News) are now proving very painful for many retired expats.
The extraordinary 'tug of war' economics going on between Downing Street and Threadneedle Street has recently impacted many British expats, especially those who rely on fixed retirement incomes. The market meltdown that came hot on the heels of the recent Kwarteng mini-budget saw the values of index-linked pensions and investments plummet. With Pound vs Euro as well as Pound vs USD exchange rates also becoming increasingly unfavourable to expats who still have GBP based holdings, this is not just proving to be a double-edged sword, it's moreover a multi-faceted and extremely harmful Edward Scissor Hands scenario. When soaring inflation is factored into this insipid financial stew the most precarious sword of all, the Sword of Damocles, is looking more and more like it possesses the face of impending penury. It's easy to see how this is a very nervous time for retirees living abroad who may not have access to supplementary incomes.
The beleaguered Pound plunged almost as if to punish Kwarteng for his £45bn tax-cutting pledges. To the markets, these cuts looked like desperate measures, offering largely unfunded tax cuts and thereby compounding an already soaring debt burden. Spooked by Kwarteng's seemingly imprudent fiscal gambles, the markets swiftly flashed red and immediately warned that UK interest rates could triple by next year. Wild speculation in the City of London left the British currency in freefall. The only detectable glee to be found was at the Labour Party Conference in Liverpool, with delegates clearly feeling distinctly upbeat (bordering on elation) as Liz Truss' faced some early woes in her Premiership. The socialist sharks were circling as they caught the distinct scent of Tory blood.
As far as anyone can see, Labour have no immediate bright ideas up their sleeves. Of course we heard the usual bluster amidst the ideologically charged clash of horns. Sure, there were Labour pledges to take us back to earlier 45p top tier tax regimes, which incidentally, weren't working out particularly well for the Treasury (apx £2bn). Threadneedle Street's stance was equally benign, as many investors eagerly awaited to hear the charge of the heroic BoE cavalry galloping headlong across the arid economic landscape to help save Britain’s battered currency.
But even the BoE cavalry could not realistically come along with promises of further interest rate hikes so soon after Chancellor Kwarteng’s mini-budget. Doing so would have flagged the rumblings of desperation, spooked the market even further and signalled an all out war between Downing Street and the Bank of England. This would have heralded the worst kind of no-confidence for Trussenomics and added even more grist to the Labour Party mill. The BoE's monetary policy committee decision isn't due until the 3rd of November. For jittery investors operating in this climate of turmoil and uncertainty, that date seems like a very long way off indeed.
Clearly, the Bank of England hopes that as markets and investors digest the implications of Kwarteng’s mini-budget, reactions will mellow somewhat. Yet, leaving the economy with a gaping wound, festering for a prolonged period whilst the patient whimpers on in an obvious state of abject distress, seems somewhat barbaric and unethical. There's a real danger that neither the BoE nor the government will be seen to be providing sufficient medication to help keep an increasingly ailing patient comfortable. Things can go downhill swiftly, meaning that inaction is not an option.
Of course, none of us can realistically apportion all the blame for market jitters on the latest occupant of Eleven Downing Street. Much of the Pound and the Euro's recent weaknesses stem from the gathering strength of USD. But dollar strength alone doesn't account for Sterling's rapid decline following Kwarteng’s Statement. There are definitely some UK home-grown factors at play here.
Britain’s image as a reliable ally to global investors now looks to be at a historically low ebb. Once any currency takes a sizeable dip, it's seldom easy to halt the habits of panic-stricken traders' in full sell-off mode. With Kwarteng pledging even further tax cuts in a budget to follow later this year, markets already stressing regarding the state of UK government finances reacted negatively. It seemed imprudent for Number Eleven to stoke up concerns with talk of yet further tax cuts whilst financial markets are still in the dark about how the BoE might respond. Excitement over a promised 'emergency' (and substantial) interest rate hike (on top of the latest 0.5% rise) was swiftly quashed with the BoE presenting it as a statement of future intent.
Across the pond, analysts predict the situation for Sterling is only likely to worsen. Some identified that the policy backdrop for the Pound is "toxic" and may therefore push the British currency into even hotter water. American financiers can only see one direction for UK interest rates, with some pricing in UK base rates hitting 7% next year. Few in America believe that Kwarteng’s strategy will boost economic growth but will instead come with a hefty price tag for the Treasury. Trussenomics may well compound the inflationary pressures that are already tearing through the UK economy.
So, Threadneedle Street stopped short of an emergency rate increase. However, investor speculation remains rife and the narrative is likely to be honed by the chance that the BoE may yet be forced to deploy heavy artillery well before the scheduled meeting of November 3rd. Even the most dovish economists think that members of the MPC will continue to talk tough on further rate rises, which could, in turn, bolster Sterling somewhat. The Bank’s hawkish chief economist, Huw Pill, is the most likely to talk up impending rate hikes.
It is said that a week is a long time in politics. Currently, even one day looks like an eternity in the world of economics. The idea of the BoE spending several weeks sitting on the fence like the Railway Children whilst a speeding economic runaway train heads for the buffers is probably for the birds.
We wait and see but my money is on substantial UK interest rates hikes. The big question is, will Sterling respond?
History teaches us that economists learn nothing from history
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